MULUKTLA ACHUTA RAMAYYA GARU Vs. OFFICIAL RECEIVER

JUDGEMENT

(1.) This is an appeal from an order of the learned District Judge of East Godaveri declaring void as against the Official Receiver a decree obtained by the appellant here, the 1st respondent in the lower Court, against the 2nd respondent in the lower Court, an insolvent. A petition to adjudicate the 2nd respondent in the lower Court and his son was presented on February 3, 1931. The 2nd respondent owed moneys on pro-notes to one Mulkutla Achutaramana, afterwards the 22nd creditor in the list of creditors filed by the insolvent and the appellants here. He threatened the 2nd respondent with a suit and the 2nd respondent executed an agreement in favour of the appellant here on March 19, 1930, undertaking not to alienate his immovable property till his debt was discharged and undertaking to execute a mortgage bond in his favour for the amount due whenever demanded by him. On the strength of this agreement the appellant filed a suit against the 2nd respondent on February 4, 1931, i.e. the day after the presentation of the insolvency petition, in the District Munsif's Court of Rajahmundry, praying for a decree for specific performance of the before-mentioned agreement. The 2nd respondent appeared by Pleader on July 31, 1931, and filed his written statement on August 7, 1931, but withdrew his defence on September 8, 1931, upon which date the suit was decreed. On October 8, 1931, the 2nd respondent was adjudicated an insolvent but not his son; and on the same date the Official Receiver of East Godaveri was appointed Receiver of the insolvent's property; and on February 13, 1932, he filed the application which resulted in the order which is under appeal. The position is that the creditor the appellant here, obtained his decree before the date of the adjudication of the insolvent but after the date of the presentation of the insolvency petition. The suit was also filed after that date. The question here is whether this decree is binding upon the Official Receiver, who contended in the lower Court that Section 28(7) of the Provincial Insolvency Act which makes the adjudication order take effect as from the date on which the insolvency petition was presented renders legal proceedings taken after that date against a debt or of no effect against the Official Receiver because by reason of Sub-section (2) on the making of an order of adjudication the whole of the property of the insolvent vests in the Court and thereafter no creditor to whom the insolvent is indebted can, during the pendency of the insolvency proceedings, have any remedy against the property of the insolvent in respect of the debt or commence any suit or other legal proceedings except with the leave of the Court. The appellant relies on Kaliaperumal Naicker V/s. Ramachandra Iyer , a decision of Ramesam, J. There the owner of the equity of redemption in certain properties presented a petition to be adjudicated an insolvent on November 16, 1920. A suit was filed on the mortgage on October 26 1921, impleading this person as the defendant. On December 20, 1921, the order of adjudication was passed On April 25, 1922, the plaintiff-applied to implead the Official Receiver also as a defendant. It was held that there was no necessity to obtain the leave of the Court for the institution of the suit as the suit was filed before the date of the order of adjudication and that the filing of a suit prior to the adjudication must be regarded outside the purpose of the Insolvency Act with reference to the provisions of Section 28(2) of the Act. On page 246 Page of (1927) M.W.N.[Ed.] Ramesam, J. says: The appellant contends that the plaintiff had not obtained the leave of the Court for the filing of that suit. Mr. Subramanya Ayyar refers me to a number of oases under Section 28(7). Most of these cases had to do with, the effect of dealings by the insolvent in the interval between the application and adjudication For instance, in Sheonath Singh V/s. Munshi Ram 42 A. 433 : 55 Ind. Cas. 941 : 2 U.P.L.R. (A) 122 : 18 A.L.J. 449, it was held that alienations by the insolvent are not valid against the Official Receiver The effect of Section 28(7) was correctly described there. The actual sections referred to there are the corresponding sections of the old Act. No vesting takes place until an order of adjudication is made. It is the making of the order of adjudication which vests the property and only upon such an order being made can any vesting take place at all. But once the "order is made, the effect created by it is, by a legal fiction, taken to relate back to the presentation of the petition or in other words the commencement of the insolvency. For all purposes of the Insolvency Act, this fiction has to be used and it is a very useful fiction; but outside these purposes it has no place. The filing of a suit prior to the adjudication may be regarded outside the purpose of the Insolvency Act with reference to the provisions of Section 28(2).

(2.) The Allahabad case referred to viz., Sheonath Singh V/s. Munshi Ram 42 A. 433 : 55 Ind. Cas. 941 : 2 U.P.L.R. (A) 122 : 18 A.L.J. 449, is a decision of a Bench of that High Court, consisting of Piggott and Walsh, JJ. It was there held that when once an order of adjudication has been made the insolvency commences by the legal fiction of relation back on the date of the presentation of the petition and that, therefore, the insolvent cannot make a valid alienation of his property between the dates of the presentation of the petition and the order of adjudication. What the debtor did in that case was to execute sale deed of his immovable property after the presentation of an insolvency petition against him. On page 435 Page of 42 All.--[Ed] in discussing Sankaranarayana V/s. Alagiri Iyer (1918) M.W.N. 487;49 Ind. Cas. 283 : 24 M.L.T. 149 : 35 M.L.J. 290 : 8 L.W. 281, a decision of this High Court, they say: we are not satisfied that there is really all the difference between the provisions of the English Law and the Provincial Insolvency Act, which appears to have troubled the Madras High Court, but it does not matter, as the view which we take is the view which was always taken from the earliest days in the administration of the Bankruptcy Law for reasons inherent in the policy of the Bankruptcy Law, some of which are contained in the judgment of the Madras High Court. The commercial community cannot be too often reminded of the risks which everybody runs in dealing with a man who is in low water and who may have committed an act of insolvency. Section 38 of the Provincial Insolvency Act which is another section taken from the English legislature, protects anybody who before the date of the order of adjudication deals with insolvent for valuable consideration but that protection has always been held to be unavailable to a transferee where the circumstances show that the transfer which he has taken is in itself an offence against the Bankruptcy Law, that is to say, a man cannot claim the protection of a bona fide transfer for value, where he is himself engaged in an act which is an act of insolvency.

(3.) Another case relied upon by the appellant was Subramania Iyer V/s. The Official Receiver, Tanjore 50 M.L.J. 665 : 93 Ind. Cas. 877 : 23 L.W. 300 : A.I.R. 1926 Mad. 432, a decision of Spencer and Madhavan Nair, JJ. In that case an execution sale was held on September 30, 1930. Seven days previously the 1 judgment-debtor, who was the father of the other judgment-debtors, presented an insolvency petition. An interim Receiver was appointed and he wrote and asked the Subordinate Judge to stop the sale. It was nevertheless held and confirmed by the Subordinate Judge on November 27, 1920. An adjudication order in insolvency was made on December 15, 1920, which was finally confirmed by the High Court. It was held that when the Official Receiver wrote to the Subordinate Judge asking him to stop the sale he was acting only in the capacity of an interim Receiver, and as he was not, therefore, in possession of the debtor's properties the Subordinate Judge was not, therefore, bound to stop the sale; that until the Receiver is actually in possession, a creditor is not debarred from proceeding to execution; and that under Section 28 of the Provincial Insolvency Act vesting only takes place upon adjudication and under Section 29 it is not till then that a Court in which proceedings are pending against a debtor is bound to stay them. The effect of Sub-section 7 of Section 28 was not there considered. Mr. A.N. Aingar as amicus curaie to whom we art very much indebted for his very able argument, has stressed the fact that the transaction in question was to give a remedy to the creditor against the insolvent's property. This he contends is contrary to the provisions of Section 28(2) of the Act which vests the property of the insolvent in the Court on the making of an order of adjudication and no creditor to whom the insolvent is indebted in respect of any debt provable under the Act is permitted during the pendency of the insolvency proceedings to have any remedy against the property of the insolvent and that, as under Sub-section (7) the order of adjudication relates back to and takes effect from the date of the presentation of the petition, the insolvency is deemed to commence on the latter date, and that from that date, the insolvency proceedings are pending. He contends, therefore, that the Official Receiver becomes the owner of the property not merely from the date when the order of adjudication is made but from the commencement of the insolvency. The result is that a debtor cannot himself after the date of the presentation of the insolvency petition which results in his subsequent adjudication enter into any transaction which will bind the Official Receiver and a person dealing with him from that date may find himself in a precarious position unless the transaction comes within Section 55 of the Act, which protects bona fide transaction. Under that section the only transactions which are protected are payments by the insolvent to any of his creditors, and payment or delivery to the insolvent, transfers by the insolvent for value consideration or contracts or dealings by or with the insolvent for valuable consideration provided that such transactions take place before the date of the order of adjudication and that the persons with whom such transactions take place have not at the time notice of the presentation of any insolvency petition by or against the debtor. Upon the question of whether the appellant had notice of the presentation of the insolvency petition the learned District Judge in his judgment says that he had notice of that petition. I am bound to say that the facts of this case gave rise to a strong inference that the appellant did know of the presentation of the insolvency petition. The agreement upon which he sued is dated March 19, 1930, and it is significant that the appellant took no steps whatever to enforce that agreement by suit for nearly eleven months after the date of the agreement and only filed his suit the day after the presentation of the insolvency petition in the District Court of East Godaveri at Rajahmundry, in the District Munsif's Court of Rajahmundry. It is difficult to avoid the conclusion that the suit was filed in consequence of the filing of the insolvency petition on the previous day. However, in my view, the question of notice is immaterial as this is not one of those transactions which is protected by Section 55. In an English case, namely, In re O Shea's Settlement (1895) 1 Ch. D 325 : 64 L.J. Ch. 263 : 12 Rule 70 : 71 L.T. 827 : 43 W.R. 232 : 2 Hanson 4, it was held that a charging order under Section 14, of the Judgments Act, 1838, upon stock or shares or money in Court belonging to a judgment-debtor is not a transaction protected by Section 49, of the Bankruptcy Act, 1883. Section 49, protected any contract, dealing or transaction by or with the bankrupt for valuable consideration provided that the person with whom the contract, dealing or transaction was made or entered into had not at the time of the contract, dealing or transaction notice of any available act of bankruptcy committed by the bankrupt before that time. That section is very similar to Section 55 of the Provincial Insolvency Act. Lindley, L.J. on p. 331 Page of (1895) 1 Ch. D. [Ed.]. says: Contract, dealing or transaction with the bankrupt means something done by him. The words do not point to a proceeding in which the bankrupt is merely passive.